What Are the Features of Annuity?
For many retirees, the peace of mind that comes from knowing exactly how much money will arrive each month makes annuities an attractive choice. Further, the following features of annuity take away the stress of trying to budget a lump sum.
Guaranteed Regular Income
As opposed to a lump sum payout, annuities provide a reliable and consistent income stream. This replicates the financial stability that comes with a regular paycheck even after you stop earning. Annuities are thus preferred among retirees seeking predictable post-retirement cash flow.
Fixed vs. Variable Annuities
Depending on whether you prioritize safety or high returns, you can choose from fixed and variable annuities. Fixed annuities offer stable returns at a guaranteed rate, while variable annuities provide returns based on investment performance. You can also go for annuities in NPS an even safer option.
Immediate vs. Deferred Annuities
You can decide whether you want to receive the annuity payout immediately after contributing your money or after a specified period. While immediate payouts help you meet urgent financial needs, deferred annuities allow your funds to grow. You should compare the features of annuity under both types of plans to make the right decision.
Customization Options in Annuities
Every person’s retirement goals and circumstances may differ. That is why, insurers offer annuities that can be customized as per individual needs. You will have the freedom to choose features of annuity, such as payout frequency, inflation protection, survivor benefits, and guaranteed income riders under the annuity plan.
Tax Benefits of Annuities
While your accumulated corpus keeps on growing, you do not have to worry about losing money to taxes. The growth within an annuity happens on a tax-deferred basis. You only have to pay taxes when payments begin, or funds are withdrawn. Moreover, you can claim deductions under Section 80C when you finally receive the annuity payouts.
Payout Period and Duration
The payout period and duration in an annuity determine how long you will receive income, as well as the size of payments. A fixed-term annuity provides payments for a set number of years, after which payments stop, while a lifetime annuity offers income for the rest of your life. Longer payout durations spread the total payout over more time, resulting in smaller individual payments, whereas shorter durations offer larger payments over a limited period.
Interest Rate Impact on Annuities
The primary goal of annuities is to provide a steady income for a secure post-retirement life, and prevailing market interest rates influence this income. In fixed annuities, the interest rate is locked in at the time of purchase. In contrast, variable annuities generate returns based on market performance, meaning income fluctuates with changing interest rates. You can determine the impact of changing interest rates on your final income using a retirement calculator.
Inflation Protection in Annuities
When it comes to wealth creation over a specified duration, inflation cannot be ignored. It erodes the purchasing power of money and the real value of your returns. You should, therefore, go for the annuity plans that include inflation-protection riders to ensure that your income keeps pace with rising costs.
How Do Annuities Work?
Once you are clear about your financial goals and features of annuity, you can select the type of annuity retirement plans you want to invest in. Whether you select a fixed or variable annuity with immediate or deferred payouts, it is important to read the contract carefully. After you sign the contract, this is how the annuity will work:
1. Investment Phase : You will pay a lump sum or make periodic contributions to keep the annuity operational. The amount, frequency, and mode of payment will depend on the policy terms.
2. Accumulation Period : During this phase, the insurer invests your funds in a variety of securities. The annuity then grows based on the type of policy chosen: fixed or variable. Another added advantage here is that the growth is tax-deferred.
3. Payout Phase : The insurance company begins disbursing regular payments, either immediately or after a deferred period. During this phase, you get a consistent income stream based on the payout option you have chosen:
- Life Annuity : It provides regular income for the rest of your life. Payments stop upon your unfortunate demise.
- Guaranteed Minimum Payment Period Life Annuity: This option ensures income for life with a guaranteed minimum payment period. If you pass away before the period ends, payments continue to beneficiaries for the remaining time.
- Joint Life Annuity : A joint life annuity provides income for two individuals, usually spouses, until both pass away. This ensures financial protection for a surviving partner, making it ideal for married couples.
- Joint Life Annuity with Period Certain: This combines features of joint life and guaranteed period annuities. Payments continue for the longer of the guaranteed term or both lives.
FAQs on Features of Annuity
1
What are the key features of an annuity?
The top features of annuity include guaranteed income, tax benefits, and flexibility with payout options. Annuity plans can also be customized based on the type of annuity, duration, and inflation protection to suit individual needs.
2
How does an annuity provide regular income?
Annuities generate a steady stream of income through periodic payments, either immediately after a lump sum investment or deferred until a future date. This ensures financial security over the payout period.
3
What are the different types of annuities?
The main types of annuities are fixed, variable, immediate, and deferred annuities. Each type offers different payout structures and levels of risk, providing a range of choices for investors.
4
What is the difference between fixed and variable annuities?
Fixed annuities offer a guaranteed interest rate and stable payouts, while variable annuities provide returns linked to market performance, leading to potentially higher but riskier income.
5
How does the payout period affect annuity features?
The payout period determines how long you will receive payments, either for a fixed term or a lifetime. Longer periods provide extended income but may offer lower periodic payments.
6
What is the role of interest rates in an annuity?
Interest rates influence the growth of fixed annuities and affect future income. Higher rates generally yield better returns, making timing crucial when purchasing an annuity.
7
Can an annuity be customized for specific needs?
Yes, annuities can be customized with features like inflation protection, survivor benefits, and flexible payout terms to match individual financial goals and risk preferences.
